ACC330 EXAM QUESTIONS WITH VERIFIED ANSWERS
Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation.
Although Loretta spends at least 40 hours per week supervising Country Collectible's
employees, she has never drawn a salary from the business. Country Collectibles has
been in existence for five years and has earned a profit every year. Loretta withdraws
$100,000 cash from the S corporation each year. Which of the following statements
accurately describes the tax consequences of these withdrawals?
A. There is significant risk that the IRS could recharacterize the payments to Loretta as
salary. Such treatment would not change taxable income for Loretta and reduce taxable
income of the S corporation.
B. There is significant risk that the IRS could recharacterize the payments to Loretta as
salary. Such treatment would increase taxable income for both Loretta and the S
corporation.
C. The withdrawals are considered taxable divide - ANSWER A
Which of the following statements about partnerships is false?
A. A partnership is a legal entity that may enter into valid contracts.
B. Partnerships are unincorporated entities.
C. Only individuals may be partners in a partnership.
D. Partnerships are sometimes referred to as passthrough entities since they do not pay
federal income tax. - ANSWER C
Which of the following statements regarding the home office deduction is true?
A. The home office deduction is limited to the taxable income of the business before the
deduction.
B. A home office deduction is not allowed for using the home office for administrative or
management activities only.
C. A depreciation deduction is not allowed for a home office.
D. In order to qualify for the deduction, a portion of the taxpayer's home must be used
regularly and exclusively to meet with clients or customers. - ANSWER A
Which of the following statements regarding limited liability companies is true?
A. Because LLCs are a relatively new organizational form, many tax questions
concerning their operation have yet to be resolved.
,B. Just like an S corporation, an LLC member's share of ordinary income is not subject
to self-employment taxes.
C. Just like a limited partnership, only LLC members who are not actively involved in the
entity's business activities have limited liability for the LLC's debts.
D. Just like an S corporation, an LLC is restricted to 100 members. - ANSWER A
Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax
year showed the following:
Ordinary business loss
$(20,000)
Short-term capital gain
2,100
Dividend income
1,600
Cash distribution
5,800
Perry's tax basis in his partnership interest at the beginning of the year was $15,400.
How much of the ordinary loss may he deduct on his Form 1040? Assume the excess
business loss limitation does not apply.
A. $14,000
B. $11,700
C. $10,200
D.$13,300 - ANSWER D
Max is a 10% limited partner in LMN partnership. His adjusted basis in his partnership
interest was $50,000 at the beginning of the current year. During the year, the
partnership earned $100,000 of ordinary income, incurred a $5,000 capital loss, and
paid $1,000 of nondeductible expenses. Max received a distribution of $2,000 from the
partnership. Calculate Max's ending adjusted basis in his partnership interest.
A. $57,400
, B. $57,500
C. $142,000
D. $59,200 - ANSWER A
William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss
and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the
sale of marketable securities and a $15,000 Section 1231 loss on the sale of business
equipment. What is the net effect of these gains and losses on William's taxable income?
A. $4,500 net capital gain; $15,000 deductible net Section 1231 loss
B. $3,300 net capital gain; $12,000 deductible net Section 1231 loss
C. $4,500 net capital gain; $12,000 deductible net Section 1231 loss
D. $3,300 net capital gain; -0- deductible net Section 1231 loss - ANSWER B
George and Martha formed a partnership by each contributing $5,000 cash. The
partnership then borrowed another $60,000 to finance its operations. If George and
Martha are both general partners, compute each partner's initial basis in his/her
partnership interest.
A. $0
B. $65,000
C. $5,000
D. $35,000 - ANSWER D
During 2019, Scott Howell received a salary of $135,000. The social security base
amount for 2019 was $132,900. How much payroll tax should have been withheld from
Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation.
Although Loretta spends at least 40 hours per week supervising Country Collectible's
employees, she has never drawn a salary from the business. Country Collectibles has
been in existence for five years and has earned a profit every year. Loretta withdraws
$100,000 cash from the S corporation each year. Which of the following statements
accurately describes the tax consequences of these withdrawals?
A. There is significant risk that the IRS could recharacterize the payments to Loretta as
salary. Such treatment would not change taxable income for Loretta and reduce taxable
income of the S corporation.
B. There is significant risk that the IRS could recharacterize the payments to Loretta as
salary. Such treatment would increase taxable income for both Loretta and the S
corporation.
C. The withdrawals are considered taxable divide - ANSWER A
Which of the following statements about partnerships is false?
A. A partnership is a legal entity that may enter into valid contracts.
B. Partnerships are unincorporated entities.
C. Only individuals may be partners in a partnership.
D. Partnerships are sometimes referred to as passthrough entities since they do not pay
federal income tax. - ANSWER C
Which of the following statements regarding the home office deduction is true?
A. The home office deduction is limited to the taxable income of the business before the
deduction.
B. A home office deduction is not allowed for using the home office for administrative or
management activities only.
C. A depreciation deduction is not allowed for a home office.
D. In order to qualify for the deduction, a portion of the taxpayer's home must be used
regularly and exclusively to meet with clients or customers. - ANSWER A
Which of the following statements regarding limited liability companies is true?
A. Because LLCs are a relatively new organizational form, many tax questions
concerning their operation have yet to be resolved.
,B. Just like an S corporation, an LLC member's share of ordinary income is not subject
to self-employment taxes.
C. Just like a limited partnership, only LLC members who are not actively involved in the
entity's business activities have limited liability for the LLC's debts.
D. Just like an S corporation, an LLC is restricted to 100 members. - ANSWER A
Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax
year showed the following:
Ordinary business loss
$(20,000)
Short-term capital gain
2,100
Dividend income
1,600
Cash distribution
5,800
Perry's tax basis in his partnership interest at the beginning of the year was $15,400.
How much of the ordinary loss may he deduct on his Form 1040? Assume the excess
business loss limitation does not apply.
A. $14,000
B. $11,700
C. $10,200
D.$13,300 - ANSWER D
Max is a 10% limited partner in LMN partnership. His adjusted basis in his partnership
interest was $50,000 at the beginning of the current year. During the year, the
partnership earned $100,000 of ordinary income, incurred a $5,000 capital loss, and
paid $1,000 of nondeductible expenses. Max received a distribution of $2,000 from the
partnership. Calculate Max's ending adjusted basis in his partnership interest.
A. $57,400
, B. $57,500
C. $142,000
D. $59,200 - ANSWER A
William is a member of an LLC. His Schedule K-1 reported a $1,200 share of capital loss
and a $3,000 share of Section 1231 gain. William recognized a $4,500 capital gain on the
sale of marketable securities and a $15,000 Section 1231 loss on the sale of business
equipment. What is the net effect of these gains and losses on William's taxable income?
A. $4,500 net capital gain; $15,000 deductible net Section 1231 loss
B. $3,300 net capital gain; $12,000 deductible net Section 1231 loss
C. $4,500 net capital gain; $12,000 deductible net Section 1231 loss
D. $3,300 net capital gain; -0- deductible net Section 1231 loss - ANSWER B
George and Martha formed a partnership by each contributing $5,000 cash. The
partnership then borrowed another $60,000 to finance its operations. If George and
Martha are both general partners, compute each partner's initial basis in his/her
partnership interest.
A. $0
B. $65,000
C. $5,000
D. $35,000 - ANSWER D
During 2019, Scott Howell received a salary of $135,000. The social security base
amount for 2019 was $132,900. How much payroll tax should have been withheld from
